August 23, 2019

Oil Price Watch November 5th 2011

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This week the market price of Brent Crude rose about $2 but this concealed big swings in the week, falling to about $106 on Tuesday (after the Greek Prime minister unexpectedly promised a referendum on the debt crisis) before rising back up to its peak for the week at Friday (after he had promised to withdraw his proposed referendum), the political turns of pessimism and optimism being reflected in corresponding pessimism and optimism in the oil market (which was also boosted by some encouraging late news on the jobs front from the US).

But in this context there was also a very interesting article in the FT on Friday “Tehran’s shadow is back over the oil market” by Javier Blas.

British map showing the Strait of Hormuz

Image via Wikipedia

Blas notes that Washington and Tel Aviv are now using harder rhetoric with respect to Iran and asks what would be the impact on oil prices of a conflict with Iran that led to the subsequent closure of  the Strait of Hormuz through which key OPEC producers Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates funnel much of their exports?

On this Blas reports that a Washington-based consultancy run by Robert McNally, a White House oil adviser from 2001 to 2003, has just released a survey of market participants which asked what price response they would anticipate in the event of such a scenario in March 2012, taking into account current supply, demand and stocks fundamentals.

According to the survey, prices would surge, on average, by $23 a barrel in the first hours of the attack, some market participants expected a spike of nearly $45 a barrel.

The consultancy also asked what the participants would expect a month after the attack, depending on the magnitude of the supply disruption and the International Energy Agency (IEA) response.

The survey expected prices up just $11 if the supply outage was short-lived. But they expected prices up by $65 a barrel if there was a prolonged disruption (three weeks’ closure of the strait) with no IEA action. The most extreme view put prices nearly $175 a barrel higher if the supply disruption was prolonged, but if the IEA used its strategic stocks, offsetting half of the supply loss, expected prices would be about $39 a barrel higher.

So why these price hikes? It can all be traced back to the analysis of the Oil Price Watch Overview.

Note the interplay of the psychological and the physical in the survey. First, see how the price was expected to rise by about 20% almost immediately. There would have been not time for this to affect the physical quantity of barrels actually being available for the buyers, this was Issue 3(a) in the Overview (expectations of a price rise) feeding into the price. And inelasticity of supply and demand (Issue 2 in the Overview) would exacerbate price hikes through these changed expectations and cut back in physical supply over time.

So keep your fingers crossed that this scenario does not happen – but do not be surprised by the effects if it does.

Price at end of week: $111.97 (up from $109.91 end of last week)

Read the Oil Price Watch Overview here